Estimating The Intrinsic Value Of Casey’s General Stores Inc (NASDAQ:CASY)

Simply Wall St
October 31, 2018

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Casey’s General Stores Inc (NASDAQ:CASY) as an investment opportunity
by taking the expected future cash flows and discounting them to today’s value.
I will use the
Discounted Cash Flows (DCF)
model.
Don’t get put off by the jargon, the math behind it is actually quite straightforward.
Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for Casey’s General Stores by following the link below.

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase.
To start off with we need to estimate the next five years of cash flows.
For this I used the consensus of the analysts covering the stock, as you can see below.
I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$31.20

$44.70

$108.50

$175.10

$280.00

Source

Analyst x1

Analyst x1

Analyst x2

Analyst x2

Analyst x1

Present Value Discounted @ 8.59%

$28.73

$37.91

$84.73

$125.93

$185.44

Present Value of 5-year Cash Flow (PVCF)= US$463m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage.
The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 8.6%.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value,
which in this case is US$3.8b.
The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number.
This results in an intrinsic value of $105.14.
Relative
to the current share price of $123.98, the stock is
fair value, maybe slightly overvalued
and not available at a discount at this time.

NasdaqGS:CASY Intrinsic Value Export October 30th 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.
You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them.
Because we are looking at Casey’s General Stores as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt.
In this calculation I’ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it
shouldn’t be the only metric you look at when researching a company.
For CASY,
I’ve compiled
three
relevant
factors
you should
look at:

Future Earnings: How does CASY’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CASY? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just
search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.

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